Crowell Roberts Investment Blog

Stocks won’t get off the seesaw. For most of the year, rally attempts were thwarted by media-enhanced fears of the U.S. slipping back into recession. Corporate earnings reports for the third quarter went almost unnoticed in the midst of media hysteria about the latest bad news. With over 90% reporting of the companies that make up the S&P 500, overall earnings of America’s biggest companies set a new record. That’s not a record since the financial crisis but a new all-time record.

Earnings are thus providing powerful support for the stock market. Media and political threats of a double dip recession were mere bogeymen but current concerns that Europe will be unable to resolve its Euro problems are real and must be addressed.

Greece and Italy provided the classical roots for Western civilization but the weak contributions of their economies today seem as if they are still based on yogurt and pasta. The Euro Zone agreements smoothed many political differences among its members but the financial crisis beginning in 2008 exposed economic disparities that will probably require major reworking of the structure of the Euro.

This is a complex problem that can be resolved but it will take time and recent indications that Europe may slip back into recession do not help. At the same time, stronger growth rates in Asia and the Americas are putting upward pressure on prices of oil and other commodities. Investors should consider the probable impact of more troubling news from Europe and increasing commodity prices.

Fortunately, the Federal Reserve is continuing its policy of low short-term interest rates, at least into 2013. With corporate profits still strong other than in banking and housing, and stock values depressed by pessimism, the market is offering good values.

Warren Buffett has commented that the best stocks to buy are often the ones already in our portfolios. Mr. Buffett made headlines recently through taking positions in two of our portfolio favorites, IBM (IBM-$186) and Intel (INTC-$24).

IBM is up to $106 billion in sales while growing earnings at a steady 10% rate. It recently raised its earnings forecast and has increased its dividend for 15 straight years. The current yield is 1.5% and it is selling at 12 times 2011 earnings.

Intel is half the size with $51 billion sales but is growing much faster. It yields 3.3% with dividend increases the last seven years. Its most recent quarter showed earnings growth up 25%, yet it is selling at only ten times 2011 earnings. Intel operates in a highly competitive arena and I suspect this modest valuation reflects fears that its chips may suffer profit margin squeezes from cheaper makers. Intel has successfully fought off competition for decades, primarily through developing new chips and recently announced another major innovation in processor speeds.

Both IBM and Intel offer attractive yields, particularly in today’s low interest rate climate. So do our favorite drug stocks, Bristol-Myers (BMY-$31, 4.2% yield), Novartis (NVS-$55, 3.6%) and Merck (MRK-$35, 4.3%). Novartis is Swiss-based and may suffer through association with the Euro group but, like the others, it sells globally ($58 billion sales).

Apple (AAPL-$377) does not pay a dividend although it easily could and will probably begin within a year or two. Its earnings for 2011 will be somewhere around $35 a share, up over 25%. It is thus valued quite reasonably for such strong growth due to concerns as to its continuing strength without its visionary Steve Jobs. His legacy of sector-leading products together with their increasing use in the business community leaves Apple with a continuing bright future.

Global growth outside the Euro Zone will continue to boost oil prices. Exxon Mobil (XOM-$78, 2.4% yield) is selling at only eight times 2011 earnings and Chevron (CVX-$100, 3.1%) at only seven. Gold will continue to be a backstop during turbulent times and Canada-based Barrick Gold (ABX-$50) is the biggest and best managed. It just raised its dividend and yields 1.1%, excellent for a mining stock.

With quarterly earnings season behind us, Wall Street will be looking to retail sales as an indication of the strength of the holiday season. Greece deserves some credit for this annual economic stimulus, as the original Saint Nicholas was a Greek.

After many headline-grabbing daily fluctuations, the stock markets are back to where they started the year. Their daily volatility has scared many investors into low yielding products like variable annuities, which are often advertised as providing stable returns. Actually, they provide high fees for those who sell them.

MetLife (MET-$32), the largest U.S. life insurer and seller of variable annuities reported that sales of this product were up 22% in its latest quarter. That’s good for MetLife and for investors who take advantage of its fear-driven low valuation of only six times earnings. MetLife is trying to sell banking and mortgage-related operations that currently make it subject to Federal Reserve oversight that prevented its recent proposal to raise its dividend. Even so, it presently yields 2.2% with very strong earnings growth.

The financial crises of the last three years shredded and stranded many banks and other financial sector stocks. Despite irresponsible attempts to blame their failures on the federal government, their own greed was the main cause. In 1989, bankers successfully persuaded Congress to repeal the Glass-Steagall Act, enacted in 1933 to separate commercial banking from more lucrative (and riskier) investment banking. The repeal permitted expansion into mortgage-backed securities, collateralized debt obligations and other overly creative inventions.

The results are now familiar. Those who sought to control risks were swamped by the drive for short-term profits. Big bank balance sheets are still tainted by these toxins and I have recommended against buying apparent bargains like Bank of America. More sensibly managed institutions like U.S. Bank (USB-$25), are expanding, adding employees while B of A is laying off 40,000 workers. USB is a buy.

In Europe, the excesses of the last decade also battered the Euro Zone currency and its economies. The creation of this union was a remarkable political achievement but it has always struggled with an unbalanced two-tiered structure. There will continue to be strains in Europe that actually may be of relative benefit to American investors.

One of my recommendations, Aflac (AFL-$44), has a minor investment in Italian bonds and recent Euro jitters have caused predictable ripples in its stock price. Aflac continues to be a buy with almost a 3% yield, a 28-year record of consecutive dividend increases and rising earnings.

Regarding the Euro, I find it remarkable that Prime Minister Berlusconi, having survived a remarkable variety of criminal, diplomatic and sexual scandals to become the longest-serving Italian Prime Minister since Mussolini, is stepping down under pressure from economic matters. I suspect there is no truth to the rumor that he intends to become President of the National Restaurant Association.

All this volatility has sparked increased trading, boosting sales of CBOE (CBOE-$27), the marketplace of options, including options on volatility. Its third quarter earnings hit 50 cents a share, up 69 percent. It remains a strong buy and I am now also recommending its bigger cousin, NYSE Euronext (NYX-$27), which operates the New York Stock Exchange and other markets. It is trading at 10 times earnings and yields 4%. I expect an extra boost upon approval by European authorities of its pending merger with Deutsche Börse.

These stocks from the financial sector represent selected exceptions to its persisting problems. Broader gains are coming from technology, energy, manufacturing and the medical sectors. Among medical stocks, Merck (MRK-$35) announced that it has 19 drug candidates in late-stage critical trials. It also raised its dividend and now yields over 5%. Rising dividends and earnings are good medicine for investment worries.

Wall Street loves jargon; its latest is “Risk on” or “Risk off” to label daily market swings. This is really only a more genteel description of the impact of greed versus fear on stock prices but it is a reminder of the importance of risk valuation in investment returns.

I have known investors to say, “I don’t want to take any risks.” That might be an understandable comment from someone who has suffered a nasty investment loss, or even an unhappy marriage, for that matter, but ignores the rewards that are available from realistic and sensible risk taking.

Investment analysts like to start risk analysis with the “risk-free rate,” usually 90-day Treasury Bills. This is currently one hundredth of one percent, about as low as a rate can get before going negative. This reflects a continuing flight from risk as buying pressure drives down yields. These low yields continue with longer maturities, reaching 2% only with ten-year terms. One-year CD’s average 0.8% and 30-year mortgages are quoted (but hard to get) around 4%.

One bit of Wall Street jargon beloved of bond traders is the “basis point,” which means a hundredth of a percent. T-bills, for example, a month ago were trading a single basis point higher. This slang might be useful for someone negotiating a home refinance to ask for “another five basis points” to enhance the negotiations.

Yields on stocks are well away from hair splitting differences calculated in basis points. IBM (IBM-$187), for example, yields 1.6% currently, almost as much as a ten-year government bond. IBM has also increased its dividend for 15 straight years. It has a high probability to continue to boost its dividends and its growing earnings are likely to lead to further increases in its stock price.

For investors, it is difficult to imagine why its stock would not be more suitable for almost any investor than a ten-year bond. An investor who dismisses IBM as “too risky” is probably insecure and one who insists on absolute certainty in investment valuations probably has issues with control. Either could easily recoup the costs of psychotherapy through more sensible risk to reward assessments.

Corporate CFO’s who need timing certainty in meeting obligations find bonds useful. So do professional traders who trade them using leverage. Investors should not try that at home, sticking to issues like Annaly Capital (NLY-$16). Annaly owns and manages portfolios of mortgage-backed securities. Its holders share in the income from the spread between the interest income on these securities and the cost of short-term borrowing by Annaly to finance these holdings.

Its current yield is 14%. Annaly also manages an affiliated REIT, Chimera (CIM-$3), which invests in more junior securities, and pays 17%. Both funds have a stated objective to provide attractive risk-adjusted returns to investors over the long-term, an objective that will be shared by rational investors taking a sensible view of risk. The obvious risk with the Annaly funds is a rise in short-term rates, pinching their spreads. With the Federal Reserve having committed to keeping short-term rates low through mid-2013, these funds remain very attractive.

DuPont (DD-$49) is another attractive risk-adjusted investment; its primary risk is sustaining growth in a challenging economy. The company just reported quarterly earnings of 69 cents a share, handily beating Wall Street estimates, as did its sales figures of $9.24 billion, up 32%. It also raised its earnings guidance for the rest of 2011 but still trades at only 11 times earnings with 22% growth expected. Its dividends yield 3.4% with further increases doubtlessly lying ahead.

Rather than trying to outguess the maneuvers of European heads of state dealing with the Euro mess, investors will do better using rational risk reward analyses.

Wall Street loves jargon; its latest is “Risk on” or “Risk off” to label daily market swings. This is really only a more genteel description of the impact of greed versus fear on stock prices but it is a reminder of the importance of risk valuation in investment returns.

I have known investors to say, “I don’t want to take any risks.” That might be an understandable comment from someone who has suffered a nasty investment loss, or even an unhappy marriage, for that matter, but ignores the rewards that are available from realistic and sensible risk taking.

Investment analysts like to start risk analysis with the “risk-free rate,” usually 90-day Treasury Bills. This is currently one hundredth of one percent, about as low as a rate can get before going negative. This reflects a continuing flight from risk as buying pressure drives down yields. These low yields continue with longer maturities, reaching 2% only with ten-year terms. One-year CD’s average 0.8% and 30-year mortgages are quoted (but hard to get) around 4%.

One bit of Wall Street jargon beloved of bond traders is the “basis point,” which means a hundredth of a percent. T-bills, for example, a month ago were trading a single basis point higher. This slang might be useful for someone negotiating a home refinance to ask for “another five basis points” to enhance the negotiations.

Yields on stocks are well away from hair splitting differences calculated in basis points. IBM (IBM-$187), for example, yields 1.6% currently, almost as much as a ten-year government bond. IBM has also increased its dividend for 15 straight years. It has a high probability to continue to boost its dividends and its growing earnings are likely to lead to further increases in its stock price.

For investors, it is difficult to imagine why its stock would not be more suitable for almost any investor than a ten-year bond. An investor who dismisses IBM as “too risky” is probably insecure and one who insists on absolute certainty in investment valuations probably has issues with control. Either could easily recoup the costs of psychotherapy through more sensible risk to reward assessments.

Corporate CFO’s who need timing certainty in meeting obligations find bonds useful. So do professional traders who trade them using leverage. Investors should not try that at home, sticking to issues like Annaly Capital (NLY-$16). Annaly owns and manages portfolios of mortgage-backed securities. Its holders share in the income from the spread between the interest income on these securities and the cost of short-term borrowing by Annaly to finance these holdings.

Its current yield is 14%. Annaly also manages an affiliated REIT, Chimera (CIM-$3), which invests in more junior securities, and pays 17%. Both funds have a stated objective to provide attractive risk-adjusted returns to investors over the long-term, an objective that will be shared by rational investors taking a sensible view of risk. The obvious risk with the Annaly funds is a rise in short-term rates, pinching their spreads. With the Federal Reserve having committed to keeping short-term rates low through mid-2013, these funds remain very attractive.

DuPont (DD-$49) is another attractive risk-adjusted investment; its primary risk is sustaining growth in a challenging economy. The company just reported quarterly earnings of 69 cents a share, handily beating Wall Street estimates, as did its sales figures of $9.24 billion, up 32%. It also raised its earnings guidance for the rest of 2011 but still trades at only 11 times earnings with 22% growth expected. Its dividends yield 3.4% with further increases doubtlessly lying ahead.

Rather than trying to outguess the maneuvers of European heads of state dealing with the Euro mess, investors will do better using rational risk reward analyses. They also might bear in mind that the two successful big companies featured here, IBM and DuPont, both now have women as CEO’s. In my personal view, women have certainly presented risks but these have been greatly surpassed by their rewards.

The latest attempts by European leaders to rescue their continent from its debt crisis are encouraging but not conclusive. This is a complex problem that continues to enhance the relative merits of stocks in companies focused outside the Euro Zone. Solidly financed global companies like Spain’s Telefonica (TEF-$22), Denmark-based Novo-Nordisk (NVO-$110) and Switzerland’s Novartis (NVS-$59) continue to enjoy rising earnings and their stocks remain buys.

In this country, the stock market has been plagued by fears of deficits and debt defaults rather than by reliable signs of economic retraction. To the contrary, domestic economic indicators have steadied. Corporate earnings continue to show overall gains, pushing stock valuations into even more reasonable figures. This is solid ground for sensible value investing in stocks in companies that can manage rising sales and earnings in these challenging times.

Inning-by-inning reports of currency negotiations in Europe push the stock market to and fro but U.S. economic recovery and accompanying corporate earnings progress are the key factors. The audience remains quite critical and even slight disappointments have pummeled stocks like Amazon. Overall, there are scattered signs of a pickup in the economy and the market’s willingness to press ahead despite unresolved uncertainties is an encouraging signal of higher prices ahead.

Our market surge is a sign of its underlying value and built up buying pressure. Europe still has major problems to address, particularly in Italy, its third-largest economy. The U.S. has its own fiscal issues but a persistently recovering economy will do more to ease deficits than any amount of political blustering.

With interest rates at near-record lows, valuations reasonable and the economy recovering, even at a weak pace, this looks like 2011 will finish on a strong note. Investor nerves are still frayed and there is no need to test our own by chasing the riff raff darlings that make headlines when there are so many quality opportunities available.

Regional banks have stayed clear of the minefields that still hobble the big money center banks. Rather than gamble that Bank of America can continue to avoid failure, I recommend US Bank (USB-$26), which has sensibly expanded from its Minnesota base to become the fifth largest commercial bank in the U.S. It recently announced record earnings, trades at 11 times earnings and yields 2%. This may not be as exciting as owning stock in some Chinese Internet company but it should be more rewarding.

ITT (ITT-$44), once a headline conglomerate, is continuing its process of disengagement. On October 31, it separates into three listed companies in three sectors: defense, industrial products and water treatment. Its price flared to $60 after these spin-offs were announced in the spring, but failed to regain investor interest after the summer market swoon.

I expect the sum of the parts to trade higher with a half dozen point aggregate increase by yearend. The package trades for 10 times earnings now with a 1% yield. The water company looks particularly attractive, the defense company less so, and I plan to be selective as to which companies we retain.

Safeguard Scientifics (SFE-$18) continues to provide a successful method to invest in smaller companies. It owns interests in 13 early-stage tech and life science companies, which it calls “partner” companies. Sales of its stakes in other partner companies have left it with over $12 in cash per share, thus these 13 investments are undervalued at less than $6. Safeguard is currently trading at less than its book value. All the partner companies are doing well and current market conditions are likely to boost its underlying investments and its stock.

Momentum is returning to quality stocks. This has been a trying year but patience is being rewarded. There will doubtlessly be further trying times and memories of recent market dips may revive panicked selling. That has never been a successful investment strategy but careful selection of quality stocks with rising earnings works quite well.

The month of October may bring early Halloween chills from its role in stock market history. This month saw the big Crash of 1929, the lesser Crash of 1987 and the beginning of the financial Crash in 2008. This October is reading from a different script as stocks have put on a nifty 11% rally since the beginning of the month, almost erasing their losses earlier this year.

The S&P 500 stock index started the year at 1257. As we begin the second half of the month, it’s around 1225, needing only another 2.5% to pull ahead. If the market manages a gain by yearend, it will be the first time it has shaken off a 10% loss during the year since 1984. That’s quite a while; in fact that was the year Apple introduced the Macintosh computer.

The latest earnings announcement by Apple (AAPL-$404) shows its momentum continuing. Both Apple and IBM (IBM-$178) met forecasts and increased their earnings projections but their stocks sold off as investors expected more spectacular results. Both stocks are buys. With a decent market, Apple stock should see $500 and IBM $200, if not this year, then in 2012.

Even with its recent comeback, most stocks remain reasonably valued compared to corporate earnings. The economy continues to show weak but positive growth with companies outside the troubled financial and housing sectors posting good numbers. Nonetheless, anxieties dominate, exacerbated through political campaigners using traditional tactics of exaggerating perils in order to appeal to voters’ fears.

With worries having pushed the market down, hints of possible solutions spark market rallies. We saw thus recently with headlines of Eurozone leaders agreeing on a Greek rescue plan. Actually, there isn’t a plan yet and it seems to me as if the seconds for 17 Euro dueling countries had only agreed on a time and place where they could all shoot at each other.

The Euro experiment seems fundamentally flawed and I doubt if we will see any dramatic resolution in the near future. There are already 10 other countries that are members of the Eurozone although they keep their own currency and I expect the whole bloc will move toward a similar looser arrangement without currency controls or attempts to regulate internal fiscal policies.

Such compromises are probably a year away, at least, and will present sporadic impacts on our stock market. Closer to home, the U.S. recovery is handcuffed by a still deteriorating housing sector. Massive restructuring of mortgage debts would help but the current political climate seems to make any such sensible steps improbable until after the 2012 election.

The outlook is for continued slow growth with low interest rates. That’s a decent environment for stock investing, not too hot and not too cold. Prevailing anxieties, undoubtedly augmented by new ones, will keep a lid on the market while rewarding growing larger companies, especially those with rising dividends.

Corning (GLW-$13) is an ideal candidate. This classy glassy company, founded in 1851, has made an exemplary adaptation to the demands of today’s global economy. Amid vigorous competition, it holds a 50% share in the market for glass LCD displays for TV’s and computers. The LCD market is down with the global slump but rebounding. Corning also invented “Gorilla Glass,” used in smart phones and tablets, including the market leaders from Apple. Other sales come from optical fiber and other telecommunications components and from its environmental technologies unit.

Earnings will be around $1.80 this year, down from $2.07, increasing to close to $2.00 in 2012, making its valuation quite a bargain. Its Board just increased the dividend 50% to 30 cents a year, a nice vote of confidence and a resulting 2.6% yield for shareholders. High quality stocks with rising dividends like Corning and IBM will do well for investors in these days of anxiety.

The death of Steve Jobs produced a remarkable flow of tributes. I cannot recall a response of this scale to the passing of anyone from the business world. The nearest was probably the death of Thomas Edison on October 18, 1931, when the New York Times ran two-dozen articles on his life and death. Many Americans observed President Hoover’s request on the day of Edison’s funeral to briefly turn off their electric lights at 10:00 p.m.

I like to believe that heaven uses Apple computers. If it does, then it will probably soon be converting to a new operating system. All Apple fans know that Steve produced an innovative new system every few years, adoption of which was only somewhat voluntary.

This illustrates his continuing drive for perfection that saw Apple become the world’s most valuable private company. Stockholders share understandable concern for the future of the company after his loss. For the time being, there are enough products in the pipeline to sustain momentum for a year or two. Apple stock is also reasonably valued at only 14 times earnings. After the anxiety-ridden selling this year, many other good stocks also share such muted valuations and a review of other companies that lost leaders may be instructive.

Edwin Land, founder of the Polaroid Corporation, like Jobs, had a passion for innovation coupled with an artistic vision. Like Edison, he was a scientist more than a businessman with 535 patents, which stands comparison with Edison’s 1,097. His instant cameras were huge consumer successes as were his presentations of new product announcements during the period when Polaroid stock was a favorite Wall Street growth story.

Unlike Apple, the company failed to plan for his succession or for a sustained product line. Digital photography killed its cameras and an instant movie system could not compete with videotape systems. It filed bankruptcy in 2001.

Eastman Kodak lasted longer. When George Eastman founded the company in 1892, photography had been around for over fifty years but was dominated by professionals with bulky equipment, much like data processing before desktop computers. The new Kodak cameras were almost given away in order to created demand for its processing services and chemicals.

Kodak grew through the years with its stock peaking in 2006 at $80. Polaroid’s instant process was a challenge that it addressed by stealing it, ultimately losing a patent suit to Polaroid in 1990 with almost a billion dollars damages, a record at that time. Japan’s Fuji Film presented another challenge, undercutting its retail sales. Although one of its engineers had invented the digital camera in 1975, its third crisis came from digital photography, which drove it out of its remaining camera business. Its stock trades now for a dollar.

Bill Gates left Microsoft in 2000 and the company seems to have lost its moxie, transitioning to a slow growth semi-utility. Intel’s Andy Grove stepped down as Chairman in 2005 and its stock remained flat or down until recently. The company has regained sales momentum, largely through sales to Apple, a demanding customer.

Apple attracts enormous attention from the financial and popular media.  Stock analysts almost invariably underrate its new product announcements, as they did quite recently with its latest iPhone model. The analysts scoffed, and criticized the performance of the new CEO, but Apple then racked up a record million new orders in an hour. It will announce September quarter earnings within about two weeks. This is a nervous stock market but Apple usually provides positive earnings surprises and additional buys, under $400 if possible, should be rewarding.

There are two tests for Apple’s future stock performance. The objective one is whether it will be able to produce repeating revenue like the billions of dollars it reaps now from licensing “apps” for the iPhone and iPad. A more subjective test is whether it can sustain the excitement that its products produced during the Jobs period. After all, no other company mentioned here ever inspired its customers to put its logo on bumper stickers. Steve Jobs ignited people’s dreams, much like Hollywood does and Detroit used to. He cannot be replaced but he left his company with integrity, loyalty from both employees and customers and the world’s most valuable brand name, not a bad record.

September’s song was a sad one for stocks as the market ended with its worst quarter since the financial crisis in 2008. The S&P 500 Index lost 14% for the quarter, leaving it down 12% for the year so far. The Dow Industrials lost a little less, reflecting investor preferences for larger companies during troubled times.

As the stock market zigzags, oil prices are also erratic, as investors have begun using them as a trading proxy for the strength of global economic recovery. Such short-term fixation with daily news ignores the underlying forces that will press energy prices higher. These anxieties are also creating remarkable bargains in global energy stocks.

Daniel Yergin, a leading energy consultant, won a Pulitzer Prize twenty years ago with The Prize, which traced and analyzed the world’s search for oil from its discovery until 1990. Since then, the search for energy has almost turned the world upside down. His new book, The Quest, begins with the Persian Gulf War of 1990-91 and continues through the return of Russia as an energy power, the rise of China and India as energy consumers, the acceleration of global warming and the persisting shortfalls of cost effective energy sources other than fossil fuels.

Energy trends are powerful and difficult to forecast. In 1957, Admiral Rickover, creator of nuclear naval propulsion, calculated that a hundred years of industrial changes had seen the provision of energy by men and animals shrink from 94 percent to 6 percent. Noting the demand in 1957 for energy, the Admiral predicted that by now we would have run completely out of fossil fuels.

Amazingly, since 1957, oil production is factually five times greater. Coal remains the principal (and dirtiest) source of global electricity production. Oil and gas make up 80 percent of the world’s energy use. Automobiles use a lot of that with a billion cars on the planet and another billion expected in twenty years.

The only alternative energy source to reach large scale us is nuclear. It is the cleanest but comes with huge startup costs and unsolved problems of waste disposal. Unfortunately, nuclear energy production may already have peaked in the face of public opposition even though many more people die every year from coal mining or oil drilling than have been lost in the entire history of nuclear energy.

These forces all point to inexorably increasing demand for oil and natural gas for the foreseeable future. Currently, energy stocks are depressed due principally to a fear-ridden stock market and illogical worries of weakening global energy demand. Lasting values are at bargain prices but these fears, even if irrational, are likely to keep a lid on prices until these anxieties dissipate.

This is not a time for stock investors to go “wildcatting.” I recommend stocks in larger companies like ExxonMobil (XOM-$73), the world’s largest privately operated energy company. It bought XTO Energy, making it a big player in natural gas. Recently, it struck a deal with Russia’s state owned oil company to swap assets for drilling rights in the Russian Arctic. Sales are $440 billion, growing at over 20% with earnings moving even faster.

Remarkably, all this is trading at only eight times earnings. Investors currently receive dividends at a 2.6% rate and Exxon has increased its dividend for 28 straight years. Further gains seem assured and an investor with capital for only one energy stock can anchor investments with this one stock.

Chevron (CVX-$93) is an attractive alternative. Sales are “only” $233 billion but it is growing earnings faster than Exxon and has a 3.1% yield. There are many others in this essential stock sector. Occidental (OXY-$78) ($21 billion sales) is growing even faster while providing a 2.5% yield. Norway’s Statoil (STO-$22) combines strong overseas growth and a 5% yield.

For investors looking for even higher yields, I suggest Sandridge Permian Trust (PER-$17), a new issue that went public this summer at $18. It owns royalty interests in 509 oil and natural gas producing wells in West Texas. The company plans to drill an additional 888 wells. Future results will depend on the success of these wells but current projections are for cash distributions for 2011 of around $1.15, doubling in 2012. This stock is projected to return almost its entire present value by 2016. The company will soon declare its first distribution, probably for November, and I expect investor attention to pick up once this is confirmed.

The much-discussed “end of oil” is nowhere in sight. Investors should take advantage of current fears and establish or augment positions in these energy stocks. Their proven management and unrelenting global energy demand will do the rest.

The stock market remains unusually erratic. It went up five straight days, then dropped four straight days, losing 6% in one week. That was its worst week since the dark days of the financial crisis three years ago. With the third quarter almost over, market averages are down almost 10% for the first nine months of 2011.

In most cases, the companies whose stocks make up these averages have continued to increase earnings. Some in stronger sectors like technology are reporting record earnings. Others, especially the banks, continue to struggle. The economic recovery continues although its pace is slow and its strength has become a subject of partisan political debate.

This is unfortunate as the resulting damage to business and investor confidence hurts everyone. Investors will do well to try to ignore the prevailing hysteria and focus on more reliable factors. One group of objective indicators will begin emerging in a few weeks with the newest round of quarterly earnings reports. These are likely to show further earnings gains in most cases, quite possibly fuelling a market surge.

Stock price action of individual stocks often provides direction. In the most recent selling frenzy, just about everything went down, even gold, as speculators sold whatever they could to meet margin calls. Larger blue chips only grudgingly gave up ground, a reminder of their importance as the core of stock portfolios.

Apple (AAPL-$400), our largest position, made a new high on September 10, then was pushed down below $400 during the carnage but pushed back nicely. (It began the year at $325.) I expect it to hit $500, probably by the end of the year, assuming its September quarter earnings do not disappoint. Unlike politicians, Apple rarely disappoints.

Current earnings estimates range from $6.05 to $8.22 with an average of $7.10. Apple’s fiscal year ends in September and the average estimate for its full year is $27.55. That’s up from $15.15 a year ago, emphasizing both its remarkable growth and its reasonable valuation on traditional metrics.

IBM (IBM-$172) has paralleled Apple’s price action. It began the year at $147 and made a new high of $185 in August before backing up recently. These two stocks make the news regularly but Bristol-Myers (BMY-$31) is a more surprising member of this set. It began the year at $26 after flat stock price performance for the past ten years, then popped to new highs in the last ten weeks. Its earnings growth is not as flashy as these technological leaders but it offers a 4% yield.

Unfortunately, similar solid earnings progress by industrial companies is meeting only nervous selling. Both DuPont (DD-$41) and 3M (MMM-$75) are trading near their 52-week lows despite rising earnings, 3% dividend yields and bargain valuations. New reports will show further increases for both companies, probably followed by overdue investor buying as fears recede of a dreaded backsliding into another recession.

With gold prices battered along with everything else, Barrick Gold (ABX-$46) and Goldcorp (GG-$45) are attractive values. Both will soon report increased earnings from their extensive operations. Gold fanatics disdain mining stocks but the best investment for such goldbugs is psychotherapy as these stocks offer 1% dividend yields in addition to attractive valuations.

Energy stocks provide higher yields, a bit larger since their stock prices backed off with recent market jitters. The current fear in this sector is that a renewed global recession put the brakes on energy demand. This ignores accelerating demand from China, India and other developing economies.

Oil prices are traditionally volatile and the big international oil companies continue to demonstrate their abilities to keep growing sales, earnings and dividends despite all the agitating crises that provide fodder for the news media. ExxonMobil (XOM-$70), still the leader, swapped assets with Russia’s state-owned oil company in a deal that will give Exxon unprecedented access to the Russian Arctic as it opens for drilling.

Exxon yields 2.7% from its current dividend, which it has increased for 28 straight years. It is currently trading for only eight times its projected earnings for the full year. Like the other stocks mentioned above, Exxon will be reporting increased earnings in a few weeks, which will probably rally stock prices.

The debt crises in Europe and the U.S. this summer frightened investors, who sent stocks plunging. Ironically, U.S. government bonds, which had just been downgraded, seemed to be the only securities anyone wanted. This panicked buying drove yields down to record lows. As recent price performance of these substantial blue chip stocks indicates, investors are carefully returning to the higher returns available from stocks.

The price swings of the last few years produced emotional swings. They also have created some remarkable valuations, both in bargain prices and wild overpayments. Three years ago, with the financial crisis in full outcry, Bank of America paid $50 billion for Merrill Lynch. Its CEO drove this transaction through with an excess of hubris, adding almost a trillion dollars of assets to B of A’s balance sheet, of which tens of billions were toxic assets.

In contrast, Barclays picked up the investment banking and capital operations of Lehman Brothers for a mere $250 million. Barclays got Lehman from the bankruptcy court, thus avoiding assuming its liabilities. It now ranks among the top ten in U.S. underwriting activity. While Merrill is making substantial contributions to B of A’s profits, its hidden balance sheet liabilities persist. These become more acute in view of the lurking Countrywide liabilities that B of A took on by buying that ill-led lender’s vast amount of shaky assets and unknown liabilities.

Even supposedly conservative Swiss bankers recently allowed an unsupervised young trader to make over $2 billion losing bets. Unlike activities like offshore oil drilling, where blunders are immediately evident, bankers can sometimes conceal their misjudgments, hoping a return to robust economic times will bail them out. Pending such a robust return, banking stocks lack appeal, even Barclays (BCS-$10) and certainly not B of A.

With news breaking daily of possible debt defaults in Europe, even very solid European based stocks have been knocked down to bargain levels. Telefonica (TEF-$19), the large Madrid-based mobile, Internet and telephone company, is a prime example. Sales are $88 billion, growing over the last five years at 17% annually year. Earnings are strong and will be about $2.50 a share this year but its stock price is down from $27 on fears about the Spanish economy and its 20% unemployment rate.

These fears are almost irrelevant. Telefonica gets only 31% of its revenues from Spain with the rest from Latin America and Europe. It is, for example, the largest wireless carrier in the U.K. Like many European companies, it pays two dividends a year. If it keeps its December payment at $.90, the same as last year, then 2011 payments will total $1.97, a yield of 10%. Its stock price will probably bounce around as skittish investors flee from scary headlines but those who stick with it will enjoy a very attractive yield with decent prospects of capital gain.

Even stocks of companies based in European countries with strong fiscal policies have suffered in the general panicked sell-off. Germany’s huge Siemens (SI-$93) will report $108 billion in sales, up 5%, yet its stock has lost a third of its value since spring. Yield is 3%.

Medical stocks provide some protection against cyclical buffeting. Danish-based Nov-Nordisk (NVO-$99) and Swiss-based Novartis (NVS-$55) are among the largest positions in my clients’ portfolios. Each is producing rising worldwide sales together with increasing earnings and dividends. Novo-Nordisk is showing strong demand for its diabetes treatments in developing economies. Novartis has become the global leader in eye care as it integrates its recent purchase of Alcon. Both are buys.

Norway’s Statoil (STO-$22) is an overlooked international oil company. Sales are $103 billion, growing at over 20% and its rapidly increasing earnings give it a P/E ratio of only six. Current yield is 4%. Like all oil companies, its results are shaped by world oil prices and by its exploration results. Both point to further gains ahead. Oil production from its home waters off Norway peaked a few years ago and the company has been expanding in all oil producing areas of the world. Recent investments in Brazil and the Arctic should add substantially to production beginning in 2012.

All five of these companies combine strong balance sheets, rising sales and earnings and superior dividend income. Their global market and financial strengths render them almost immune to the fiscal and currency squabbling that dominates the current business news from Europe. Current stock price choppiness could persist for months but savvy investors will use this period to benefit from the anxieties of others. These Old World stock aristocrats are currently in the bargain basement.

The stock market is bouncing in a trading range within a band of about a thousand points on the Dow Jones Industrial Average. When it nears the top of the range, it hesitates like someone fearful of diving off a high board. As fears drive it down, it bottoms out somewhere near 11,000 as unusually reasonable values, particularly on solid blue chips, bring in renewed buying.

This contest between fear and greed is what has made markets fluctuate since their invention. The stock market’s long-range trend remains up but its behavior over the last decade has been curiously flat. During the 1990’s, the Dow went from 2750 to almost 11,500. The collapse of the dot.com bubble set it back, but it still ended the century at 10,700, about where it is now.

Its stagnant record since 2000 contrasts with its performance for the preceding century, which saw stock prices gaining 5% annually, even before adding dividends. Popular stocks have been mixed since 2000. So far this century, Microsoft and Wal-Mart are flat, Ford down 50% and General Motors lost 100%. Chevron is up 50%, IBM and Costco doubled, McDonald’s tripled and Apple is up 5000%.

The new century saw investors worried whether their computers would crash with the new Millennium. Less than a year later, such concerns were forever overridden by the tragic events of September 11 that continue to shadow our thoughts. Their costs were borne most heavily by those who died in the attacks and by the six thousand American dead in our armed services.

In economic terms, a study by Brown University estimates the dollar costs of the wars in Iraq and Afghanistan at $4 trillion. This staggering sum, equal to the total of all federal deficits since 2006, includes interest costs, as the war expenses were mostly borrowed. It also adds estimated future payments and services to veterans.

Sadly, many veterans will return to receive only thanks for their service and maybe a parade, when they might prefer an offer of a good job. I continue to hope that our leaders and prospective leaders will acknowledge that our fiscal situation is largely due to the anomaly of a housing market collapse following the bills for two wars that are winding down.

Our current economic problem is job growth, not deficit reduction, which can come later. At the least, I would hope to see stimulus measures targeted for veterans. New job training and other education, perhaps a revived GI Bill, would help. Service people spend a lot of time in education, either in training or instructing, and our educational system could benefit from the skills and discipline of these men and women.

Another cost of 9/11 is the lingering fears that have depressed so many. These probably contribute to the flat performance of the overall stock market since then. Persisting anxieties may also increase to the heightened market volatility. Fluctuations of 4 percent or more during a trading day are now six times more common than in the 1990’s.

Investors should use the down bounces to add to quality blue chip dividend payers. Proven winners include Chevron (CVX-$96), IBM (IBM-$163), Costco (COST-$80), and McDonald’s (MCD-$86). No dividend, but Apple (AAPL-$385) remains a buy at a remarkably reasonable 14 times 2011 earnings, a more moderate ration than it sported back in 2000.

Volatility will probably continue as long as the media exaggerate the impact of every event that comes their way. Investors can profit from this with stock in CBOE Holdings (CBOE-$26), the operator of the Chicago Board Options Exchange. Besides options on stocks, it trades options and indices on volatility, itself, as well as popular exchange-traded funds. Earnings this year will be around $1.50, up 50%, and there is even a 2% dividend yield.

These have been trying times. This country still leads the world with its economy and its resilient people. Giving in to fear concedes a victory to terrorists. A confident response to challenges as we saw with the U.S. measured support within NATO in support of the Libyan people made sense. That strategy was successful as will be thoughtful investing, particularly as investors get their confidence back. That will come with time and a recovering economy.